Sell fixer-upper houses and pay no taxes

You can avoid paying income taxes on the gain of a fixer-upper house. This strategy involves taking advantage of the tax-free gain on the sale of a home. For people who love to work on houses, this can be a great way to make money and pay no taxes.

This strategy requires that you live in the house for 2 of the last 5 years. The tax-free gain is up to $500,000 for couples and $250,000 for singles. The tax-free gain is a lifetime gain. As an example, if you are married, you could sell 5 houses with gains of $100,000 before paying any taxes.

Normally the gain is not reported on your tax return if it is a tax-free sale of home gain. However, if the sale is reported to the IRS on a Form 1099-S, Proceeds From Real Estate Transactions, you will need to report the sale on your tax return. Since you received a Form 1099-S for the sale, the sale should be reported on Form 8949 and Schedule D in your tax return. The sales price and cost basis will be the same amount, which will result in no gain.

If you have never flipped houses, you will need to have some crucial knowledge before jumping in.

It's crucial that the real estate contract include an inspection clause.

To be successful with this strategy, you will need to be able to accurately estimate a purchase price that will provide the profit that you desire. This requires calculating the cost to repair the house and its likely market value after the renovation. Start by adding up the costs to renovate the property based on a thorough assessment of the condition of the house, including materials and labor. Include another 5 to 10 percent for unforeseen problems.

Remodeling a fixer-upper can cost a lot of money, so it's critical you have the right financing lined up. Some home renovation mortgages allow you to roll remodeling costs into your loan amount with a single mortgage.

These programs include the Fannie Mae HomeStyle Loan, Freddie Mac's CHOICERenovation Mortgage, FHA 203(k) loan, and VA renovation loan.

One problem that you may encounter with this strategy is that a lot of lenders are wary of approving mortgages on houses in poor condition to people without great credit. One way to get around this is to buy the home financed by the seller. This way, you also avoid any hassles with mortgage companies, and you can negotiate the interest rate with the seller.

This IRS rule allows you to repeat this process every two years, keeping all that tax-free income over and over.

Selling fixer-upper homes can enable you to make hundreds of thousands of dollars in profits while avoiding paying tens of thousands of dollars in taxes.

To further help the readers of my column, I am offering a free copy of my book Fight the IRS and Win, Secrets of an Enrolled Agent to anyone who contacts me.

David Zubler is a tax accountant and Enrolled Agent in East Tennessee, providing tax strategies and representing clients before the IRS and has over 25 years of tax experience. He is the author of five tax books and is the founder and president of Your Tax Care. The company provides business and tax education to the public at its website, David has appeared on national tv, and recordings of David’s daily tax tip radio program are also available. David can be reached at (865) 363-3019 or contacted by email at